Venezuela's fiery talk riles markets

Ecuador, Bolivia take their cue from Chavez in market-unfriendly moves

By

PolyaLesova

NEW YORK (MarketWatch) -- Venezuelan President Hugo Chavez and his allies in Ecuador and Bolivia have riled the markets with their fiery rhetoric and interventionist policies.

While the outlook for rest of Latin America this year is generally positive, it's been hard to ignore the expanded powers and political boldness of President Chavez. Chavez received broad authority from Congress to rule by decree for 18 months on Wednesday, which will empower him to nationalize key industries as he has promised to do.

"The Venezuelan government has been taking baby steps over the last two years toward deeper state interventionism," said Patrick Esteruelas, an analyst with the Eurasia Group. "No sector or industry is completely safe at this point."

Chavez has pledged to nationalize the largest telecom, the electricity industry, and important oil assets, and to revoke Central Bank independence. The expropriation of key industries might cost a number of American companies dearly. Plans to nationalize the electricity industry include the giant firm Electricidad de Caracas, in which Arlington, Va.-based AES Corp.
AES, -0.09%
owns an 82% stake.

Chavez has said that his government won't pay the market value for the largest telephone company in the country -- Compania Anonima Nacional Telefonos de Venezuela, or CANTV
VNT, -1.43%
when it goes ahead with plans to nationalize it. It seems increasingly unlikely that Verizon Communications Inc.
VZ, -0.22%
which owns a controlling 28.5% stake in CANTV will be fairly compensated. See full story.

"It doesn't really make sense to invest in Venezuela at this point," said Juan Pablo Fuentes, economist at Moody's Economy.com, adding that investor sentiment is very negative. "It would really be a gamble. The problem is that no one knows how much the government is going to pay." See full story.

Venezuela, a founding member of the Organization of Petroleum Exporting Countries, was the world's eighth-largest oil exporter in 2005. Amidst ongoing negotiations with foreign oil companies, Chavez has said he would unilaterally claim majority stakes for his nation in four extra-heavy crude projects in the Orinoco River basin. Exxon, Chevron, BP, ConocoPhillips
COP, -1.67%
France's Total
TOT, -1.24%
and Norway's Statoil
STO, -2.04%
all have stakes in the projects, which together produce about 600,000 barrels a day, or around a fifth of Venezuela's total production. See full story.

Ecuador might default on external debt

Following the lead of his close ally Chavez, Ecuadorian President Rafael Correa has demanded a national referendum on whether or not the country's constitution should be rewritten to restrict the authority of political parties. In the capital Quito on Tuesday, supporters of President Correa armed with sticks and stones invaded the Congress building to demand that lawmakers support the proposed referendum, the Associated Press reported.

Correa has described the Ecuadorian Congress, where he has almost no backing, as "a sewer" of corruption. He has rejected a free trade agreement with the United States, and wants to shut down a U.S. military base in Ecuador. The president has also put off investors by indicating he might default on external debt obligations, calling portions of the country's debt illegitimate.

Moody's Investors Service downgraded Ecuador's sovereign ratings deep into junk debt territory, citing concerns that the country might default on its debt obligations in the near future.

"Given the considerable resources Ecuador's government has accumulated in light of the oil windfall of the past few years, a decision to restructure obligations is purely based on ideology," said Alessandra Alecci, a vice-president and senior analyst at Moody's, in a statement. See full story.

Moody's action follows a downgrade by Fitch Ratings last week. Fitch cut the long-term foreign currency issuer default rating of Ecuador to CCC from B-, saying a debt default by the country is very likely in the short term. See full story.

"From an economic standpoint, they have no reason to default," Esteruelas said. "The current government is inheriting a fiscal surplus of approximately 4% of GDP. Oil prices have recovered, the balance of payments is extremely healthy and positive. The government is liquid enough to continue servicing debt payments."

"This is not a question of a capacity to pay, but of a willingness to pay," Esteruelas said. "This is a political and ideological decision that rests on the shoulders of one man -- Rafael Correa."

Ecuador, whose population numbers 13 million, is an oil exporter, but many of its people live in poverty. The country suffered a severe economic crisis in late 1999, which was precipitated by natural disasters and a slump in world oil prices.

Inflation soared, the banking system broke down, and Ecuador defaulted on its external debt that year. In an effort to stabilize the economy, the government adopted the U.S. dollar as its official currency in 2000. Ever since, GDP has steadily risen, inflation has fallen, and the rally in oil prices has contributed to the economic recovery.

In Bolivia, one of the poorest countries in Latin America, President Evo Morales, another close supporter of Chavez and outspoken critic of the United States, nationalized the country's natural gas reserves in May last year. Morales has also promised to nationalize the mining industry, according to reports. The majority of Bolivia's nine million people live in poverty, even though the country has rich deposits of natural gas, tin, zinc, lead, silver and gold, which represent the country's main exports.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.